How to allocate a RRIF for secure income in retirement

Add to all this the “tariffying” environment of the Trump trade war, and with it fears of a recession or worse, and it’s certainly not a time for retirees to take excessive risk. I mentioned in my previous column about registered retirement income fund (RRIF) withdrawals advisor John De Goey’s recommendation for retirees to “de-risk” their portfolios. For this column, I followed up with De Goey about the old rule of thumb that your age should equal your fixed-income exposure (bonds and bond exchange-traded funds (ETFs), guaranteed investment certificates (GICs), money market funds and preferred shares). For example, that rule would suggest a new RRIF owner aged 71 might have 71% fixed income and just 29% stock exposure.

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New rules for your asset mix

However, De Goey says that guideline is outdated. He showed me a formula that was new to me and perhaps most readers. “My view, after taking longevity into account, is that you should use age times the decimal of your age until you get to RRIF age—71. This assumes that the client is not particularly risk-averse. The portfolio still has to be suitable.”

So, under this new rule, and assuming the other qualifications apply to your personal circumstances:

• a 50-year-old should be 50 x .50 = 25% in fixed income;
• a 60-year-old should be 60 x .60 = 36% in fixed income;
• and a 71-year old-should be 71 x .71 = ~ 50% in fixed income.

Beyond that age, however, De Goey thinks 50% fixed income is the maximum. “People over the age of 71 should be able to withstand having half their money in equities even if they’re in their 90s, because the risk associated with the 50/50 portfolio is quite low.” 

Allan Small, senior investment advisor for Scarborough-based IA Private Wealth Inc., says the amount of equities and fixed income in an account (at any age), should be based on the needs or investment objectives for that portfolio.

“Thus, if you need growth or if you need to maintain a rate of return that’s higher than what a lower-risk, fixed-income product would pay, then an investor will be forced to invest in the equity markets to obtain a higher return than what fixed-income investments would pay. We all would like to make the most money with the least amount of risk. If someone could keep their money in fixed income only and be happy with a 3%-ish rate of return then that works. However, for many that low rate of return does not cut it.”

Age has little to do with it: “I have clients in their early 30s in GICs and investors in their late 70s invested in the stock market.”

Investing in an age of uncertainty

I was recently interviewed by Small on his Allan Small Financial Show, along with financial commentator and broadcaster Patricia Lovett-Reid, formerly a TD Waterhouse senior vice-president, and later a CTV commentator. Small probed us on the current investor psyche and how to position for the global trade war. 

Lovett-Reid cited the term “Triple T,” which stands for Trump (U.S. President Donald Trump), trade and tension. Reviewing past investor panics, she said it is “different this time in that we have an individual wreaking havoc on a global platform.” Even so, she suggested staying the course with quality holdings, albeit more defensively with utilities, telecom, financials and gold.

Retirees should not abandon the “stocks for the long run” stance, she said. If you can’t sleep at night, ask your advisor what you can do about it. On a personal level, Lovett-Reid says she has not made any drastic changes to her family’s asset allocation. 

One focus of the interview was our “crystal ball” for markets by end of year. All of us thought they would likely be a bit higher from where they were in late April. Lovett-Reid said the TSX should outperform for the rest of 2025, based on its energy and materials stocks. My view assumed Trump would partly back down from his harder-nosed tariff positions. But if he doesn’t, I warned, “Look out below.” 

Arguably, those with defined benefit (DB) pensions and the usual government pensions can consider those to be a form of fixed income. That leaves more room to take risk with equities in other parts of one’s retirement portfolio. In a follow-up email, Lovett-Reid said, “As someone with a DB [pension], I tend to skew toward more equities. And, yet, I do like the 60/40 split of equities to bonds. I’m very much about asset protection versus accumulation, so we are erring on the cautious side.” 

Should those without DB pensions annuitize?

What about annuities? In the past, I have referenced retired actuary Fred Vettese’s suggestion in various articles that retirees, at least those without employer-sponsored DB pensions, should partly annuitize when their registered retirement savings plan (RRSP) must be converted to a RRIF. 

Depending on timing, Vettese has in the past suggested that 20% or 30% of an RRSP/RRIF could be annuitized. Asked for his current stance, Vettese clarifies he does “consider annuities to be fixed income. Too bad long-term rates are low in Canada—although not in the U.S.—since it makes annuities less attractive. Also, I think there is an elevated risk of higher inflation in the short term.” So, both interest rates and inflation make annuities suboptimal right now, even for this knowledgeable source who is well acquainted with the upside of annuities.

For his part, Small has avoided annuities “because interest rates have been so low that it was never worth it. You might as well just buy a money-market fund. For many years annuities just returned your own capital back. So, no, I do not usually invest in annuities.”

Similarly, Lovett-Reid says she’s “not a big fan of annuities in a low-interest-rate environment; however, I’m a big fan of not worrying about outliving your money.” For those lacking DB pensions, “annuities can provide guaranteed income that reduces the risk of outliving your money. An added benefit for those who struggle with spending discipline is that an annuity creates a structured payout… . You can only spend the money you have, and that reduces the risk of overspending in early retirement years.”

As for RRIF asset allocation, Lovett-Reid is “still a fan of equities in your portfolio. You could spend a third of your life in retirement and want to keep up your purchasing power. What if you live too darn long? Longer life expectancies require the growth potential that stocks offer over time.”

She concedes it might make sense to gradually reduce stock holdings to 30% or 40% as you age, depending on health and income requirements. But, she warns retirees to be cautious about being too conservative: “You want to keep up purchasing power, and consider dividend-paying stocks or low-volatility funds for stability and income.”

I also asked occasional MoneySense contributor Dale Roberts for his ideas on de-risking. Roberts, who runs the Cutthecrapinvesting blog, likes the idea of retirees using defensive equities in concert with bonds, cash and gold. “We can look to low-volatility ETFs such as ZLB-T for Canadian equities. The defensive sectors are consumer staples, XST-T, utilities, ZUT-T, and healthcare. Given that there’s no healthcare sector to speak of in Canada, we’d look to U.S. and international options.” Generally, retirees take on too much risk and so could benefit with a “modest allocation” to annuities, says Roberts. 

Calculate hurdle rates before deciding on annuitizing

Matthew Ardrey, Senior Financial Planner with Toronto-based TriDelta Private Wealth, also believes annuities may still play a role for some clients. But, before annuitizing a RRIF, “I would strongly recommend completing an analysis to see what the hurdle rate is before making a permanent decision that will affect someone for the rest of their retirement.”

Ardrey defines the hurdle rate as “the minimum acceptable rate of return required for an investment or project to be deemed worthwhile. It serves as a benchmark, and if an investment’s expected return falls below the hurdle rate, it’s generally not considered acceptable.”

Cashing in 20% to 30% of a RRIF for an annuity is “a material amount of most Canadians’ net worth and it is worth understanding what they are receiving for it.” You need to examine and understand various options that will affect how much the monthly payment is (i.e. guaranteed payment period, survivor benefits, inflation protection). “Based on the options chosen and an assumed life expectancy, we can forecast a future stream of payments for the retiree. The higher the rate of return calculated, the better the annuity option is versus the opposite for a lower rate of return.”

If a Canadian investor has just a 3% hurdle rate, Ardrey suggests the RRIF is the better option but if the hurdle rate is 8% the annuity is preferable. “To assume an investor can average 3% per year is very reasonable versus 8% per year, which is much more difficult. Even if the investor has a 5% to 6% hurdle rate, it can be that the RRIF is the better option. If your portfolio has a yield of 4% from dividends and interest, which are relatively stable, then all you need is another 1% to 2% to meet the hurdle rate from capital appreciation, which does not seem like an out-of-reach target in my mind.”

As in all things financial, it helps to know the answer to the impossible question of when an investor will die. “The longer they live, the better the annuity is. If they die prematurely, though, then keeping the capital in the RRIF is the better option.”

The problem with exiting the market

As for Trump’s global trade war, Ardrey cautions that “historically in periods of volatility, pulling money out of the market has not been the right decision. By changing the asset mix to lower your equity exposure, a Canadian investor would be doing exactly that with a portion of their portfolio. Instead, focus on the long term when it comes to equity investing.” Ardrey also raised the quandary Lovett-Reid mentioned about pulling money out of markets: When to get back in? “How much do the markets need to recover before reinvestment happens?”

If a retiree is 50% in stocks, the other 50% can form the basis of future withdrawals in volatile markets, Ardrey says. “I am not selling stocks to raise cash for RRIF payments, but taking the payments out of cash equivalents or fixed income, as RRIF minimum withdrawals are usually in the 5% to 10% range and are often coming out monthly.” Ardrey wants to keep stocks for future growth, since “they are the best form of inflation protection over the long term.” Ardrey typically projects client life expectancy to age 95. “That is 20 more years that I need to ensure there are available funds for them. Thus, there needs to be a balance of volatility reduction for today mixed with preserving purchasing power for tomorrow.”

Read more Retired Money:

• Canadian seniors, watch out for these scams
• Why “unretirement” may be the fate of so many Canadians
• How RRIF withdrawals work when you have multiple accounts
• Why a reverse mortgage should be a last resort for most retirees

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.

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